Scope of MEA

8/14/2019 Scope of MEA

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Managerial economics is the

integration of economictheory with business practice

for the purpose of facilitatingdecision making and forwardplanning by management


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Applies

economics tools andtechniques to business

andadministrative decisionmaking


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From frictional

profit theory : Profit from

noncompetition Profit from innovation Profit from efficiency


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Demand is the quantity of agood or service that customersare willing and able to purchase

during a specific period under agiven set of economic

conditions.


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Managerial economics is used to managecost effectively.It consists of three branches:competitive markets,

market power,and imperfect markets.

A market consists of buyers and sellersthat communicate with each other forvoluntary exchange. Whether a market islocal or global, the same managerialeconomics apply


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Concepts of ME

A seller with market power will havefreedom to choose suppliers, set prices,and use advertising to influencedemand. A market is imperfect when

one party directly conveys a benefit orcost to others, or when one party hasbetter information than others.

An organization must decide its verticaland horizontal boundaries. For effectivemanagement, it is important todistinguish marginal from average

values and stocks from flows.


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Application.

(a) Businesses (such as decisions in relation

to customers including pricing andadvertising; suppliers; competitors or theinternal workings of the organization),nonprofit organizations, and households.

(b) The old economy and new economy inessentially the same way except for twodistinctive aspects of the new economy: the

importance of network effects and scale andscope economies.


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i. network effects in demand the benefitprovided by a service depends on the totalnumber of other users, e.g., when only oneperson had email, she had no one to

communicate with, but with 100 mm userson line, the demand for Internet servicesmushroomed.

ii. scale and scope economies scaleability is

the degree to which scale and scope of abusiness can be increased without acorresponding increase in costs, e.g., theinformation in Yahoo is eminently scaleable

(the same information can serve 100 as wellas 100 mm users) and to serve a largernumber of users, Yahoo needs only increasethe capacity of its computers and links.

iii. Note: the term open technology (of theInternet) refers to the relatively free


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Nature of Managerial Economics 1) Integration of Economic Theory and business management

:Managerial Economics is integration of traditional theoreticalconcepts of economics with problems of managements of

business. It lies midway between economics and business

management and serves as a link between the two. Business

matter is said to be the subject matter of the managerial

economics.

2) Application Oriented: IT deals with the application of

economic principles to the problems of the firm. It uses the

various financial data of profit and cost.

3) Character of Microeconomics: micro economic means the

study of individual economic behavior where resourcesare costly, e.g., how consumers respond to changes inprices and income, how businesses decide onemployment and sales voters behavior and setting oftax policy.

4) Concerned with the reckoning of profit only


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Scope of Managerial Economics

(a) Microeconomics the study of individual economicbehavior where resources are costly, e.g., howconsumers respond to changes in prices and income,how businesses decide on employment and sales,voters behavior and setting of tax policy.

(b) Managerial economies the application ofmicroeconomics to managerial issues (a scope morelimited than microeconomics).

(c) Macroeconomics the study of aggregate economicvariables directly (as opposed to the aggregation of

individual consumers and businesses), e.g., issuesrelating to interest and exchange rates, inflation,unemployment, import and export policies.


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THE ISSUES ADDRESSED BY

MANAGERIAL ECONOMICS

WHAT TO PRODUCE?

HOW TO PRODUCE?

HOW TO DISTRIBUTE?


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WHAT IS THE MARKET?

Market is the platform whereconsumers and producers seek tomaximize satisfaction and profits

respectively ,with and negotiate andarrive at the best possible solutions.

In the Market there are two prominentforces

Demand

Supply


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Economics shows the how the market

mechanisms are provides solution

If the outcome of the working of marketforces is the emergence of one large supplier ,such as Microsoft , in the computer software

industry

Will the supplier then exploit the market,

Will the supplier become complacent about

efficiency because there is no one to competewith?

Thus economics provides area of

regulation directing the market forces to


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MARKET IN MANAGERIAL ECONOMICS

There are also such situations where the market failsto give solutions for example

Let us take the case where the Government decides tobuild a lighthouse ,How much should the users be

charged ,and,if charged how can the non-payers beprevented from the lighthouse ? The market will notprovide solutions because users will not reveal theirpreference and the value attached to the services oflight house,because they can continue to use the light

from the lighthouse without revealing its worth tothem.This effectively means that the demand force isnonexistent and so the market mechanism ,which relieson the interaction between demand and the supply


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ECONOMICS

MICRO ECONOMICS

1) Market Economy

a) Theory of Demand

b) Theory of production(a+b =Theory of product pricing).

2) Theories of Distribution

i) Rent

ii) Wagesiii)Interest

iv) Profits

3) Welfare Economics


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Macro Economy

Different Policy to solve the major

Problems.Economy problems-Poverty

,unemployment, inequalities inincome and wealth ,inflation anddeflation etc

Policies- Industrial, Trade etc


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Scope of ME

Demand Analysis

Cost Analysis

Pricing practices and policies Profit Management

Capital budgeting


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DEMAND ANALYSIS

Any firm stands as an economicorganisms that turns its productiverecourses to good that are to bedemanded or sold in the market.Thus ,demand analysis is quitenecessary for planning of the

business and it is the most importantturning point in managerialeconomics, demand analysisinvolves the study of demanddeterminants, demand distinctions


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Cost Analysis

For sound profit planning andcontrol and also for better practices, It is essential that economics costestimates be found out and effort sbe made to measure or quantifythem. The various factors that result

in variations in costs estimatesneed special attention so as to be ofany use to management .The maintopics that come under cost analysisare cost concepts, classification of


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Pricing practices and

policies Managerial economics has to deal

with pricing as a most importantfield. Price gives the income of afirm, and successful firm depends onthe accurate price decision taken byit .the various important aspects that

are dealt with the managerialeconomics are price determination invarious Markets, pricing policies andstrategies adopted by different firms,differential pricing and price


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Profit management

Long run profit is the chief aim of allenterprises . However, business runsunder the cover of uncertainty. Thereare variations in Cost and incomes

which are the results of internal andexternal factors. Future expectationsare difficult to realize and hence, it isdifficult for management to calculatethe exact planning.

Here managerial economics deals withnature and measurement of profit

,choice of an appropriate price policy,


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Break Even Analysis

Owners and managers need to be familiarwith tools and techniques that aid them inmaking short-term and long-term

decisions. One good tool that helps inmaking decisions is known as Cost-Volume-Profit Relationships.

Cost-Volume-Profit Analysis deals with howcosts and profits change with a change involume. It analyzes the effects on profitsof changes in such factors as variablecosts, fixed costs, selling prices, volume,

and the mix of products sold


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DEFINATION

Break-Even Analysis, one of thetools of Cost-Volume-Profit Analysis,determines the break-even saleswhich is the units and/or sales dollarswhere total sales equals total costs(expenses).


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Some examples of decisions where

Cost-Volume-Profit analysis can

provide help are:

What price(s) should we charge for our products orservices ?

How many units of a product should we produce ?

Should we spend more on advertising ?

Should we add or delete a product line ?

Should we accept or decline a special order ?

What sales mix (different products) should we strive

for ? What is the effect of a change to a different raw

material supplier ?

Should we increase or decrease our work force ?

How should we make our products ?


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Simple Breakeven Analysis

Two important definitions used inbreak-even analysis are:

Variable Costs (Expenses) are coststhat change directly in proportion tochanges in activity (volume).

Fixed Costs (Expenses) are costs thatremain constant (fixed) for a giventime period despite wide fluctuationsin activity (volume).


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example to illustrate

break-even analysis.

FleeMarket Bargains information, costs, andprices:

Sells cartoon watches that have a cost of$10.00 (variable cost-expense)

All unsold watches may be returned to the

supplier Booth rental costs $ 100.00 for the day (fixedcost-expense)

Selling price of the watches is $20.00 We will use the above information to calculate

the number of watches (units) and the salesdollars we need in order for our flea marketbusiness to break even for the day.

There are three methods that can be used tocalculate our break even point:

Equation Method


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Methods used in Break even

Analysis Basic Breakeven Equation Method

Sales = Variable Expenses + FixedExpenses + Profit.

Contribution Margin Method

The Unit Contribution Margin is the differencebetween your product's unit selling price andits unit variable cost.Unit Contribution Margin = Unit Sales Price -Unit Variable Cost

The graphical approach has an X-axis(horizontal) that repesents Units (volume) anda Y-axis (vertical) that represents Dollars andcontains lines for:

Sales

Variable Costs (Expenses)Total Costs (Expenses)


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Capital Budgeting

A major problem facing a businessmanager is the capital investment ofthe firm .Capital Budgeting involvesplanning and control of capitalexpenses .Under this topic,managerial economics includes

application of economic principlesand concepts and their adjustmentwith various uncertainties brought upbefore a business firm .


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INCREAMENTALPRINCIPLE


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INCREAMENTAL ANALYSIS

The incremental reasoning is used inaccepting or rejecting a businessproposition or option. Whenever amanager takes decision he asks thequestion "Is it worthwhile?" Theimplicit criterion is that incremental

benefit of the decision should exceedits incremental costs. Decision oraction is worthwhile already if thedecision maker or is the firm canexpect to be better off than before.

Original reasoning forces manager to


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Original reasoning forces manager toexamine the changes in totalrevenues and total costs resulting for

changes in production, sales, priceand related decisions. Wrongdecisions may follow if the focus ison the concept of average ratherthan on marginal analysis.

The two basic components ofincremental reasoning are

1) Incremental cost

2) Incremental Revenue


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TYPES

Incremental Cost :The encompassing change that acompany experiences within its balance sheet due toone additional unit of production.

Incremental revenue: For a company, this is the totalamount of money received by the company for goodssold or services provided during a certain time period. Italso includes all net sales, exchange of assets; interestand any other increase in owner's equity and iscalculated before any expenses are subtracted. Netincome can be calculated by subtracting expenses from

revenue.

Refers to the increase of revenue between oneinvestment alternative and another. Incrementalrevenue is used in financial decision making.

Incremental Revenue= New Revenue - PreviousRevenue


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Documents

Scope of MEA